The Telstra Corporation Ltd (ASX: TLS) share price is down around 10% over the past month, is its share price a buy?
Telstra is our country’s oldest telecommunications business, having built the first telegraph line in 1854. In 2019, it provides more than 17 million retail mobile services, around 5 million retail fixed voice services (e.g. home phones) and 3.6 million broadband services. Telstra also has operations in eHealth, network applications and subsea cabling. In 1997 (until 2006), the Government sold Telstra to Australian investors by listing the shares on the ASX. The second batch of Government share sales, called “T2”, was conducted in 1999 at $7.40 per share.
Time To Buy Telstra Shares?
There has been a flight to safety in recent months as investors look for a safe place with the trade war scaring investors and low interest rates making harder to find value or income.
When Telstra shares were below $3 I can see why investors were interested in finding a bargain – the Telstra share price has gone up 30% in 2019.
The thing is, over time the share price will follow earnings. And Telstra’s earnings continue to go lower because of the NBN as we saw in the FY19 result. Net profit after tax (NPAT) declined by 39.6% to $2.1 billion.
Management said Telstra suffered a negative $600 million of recurring EBITDA (click here to learn what EBITDA means) during the year. Underlying EBITDA would have only fallen by 4% excluding the NBN headwinds. Telstra said EBITDA has been impacted to the tune of $1.7 billion since FY16 and it’s only halfway through the recurring financial impact of the NBN.
This is the main problem. Sure, Telstra is cutting costs (which is very painful for the employees involved), but that can only be done once and only goes so far.
The only businesses I want to be invested in are ones that can grow profit faster than revenue. For Telstra it was the other way round, revenue fell 3.6% but net profit dropped by 39.6% partly because of lower overall margins due to the NBN.
I can only see this level of poor economies of scale being reversed with the introduction of 5G which may lead to new services (like automated cars) and 5G-powered home internet paying Telstra for the service.
Time To Buy Telstra Shares?
I don’t think it is time to buy Telstra shares. It’s valued on the market at 16 times the estimated earnings for the 2020 financial year.
If earnings keep falling then Telstra could be a value trap. And it will be interesting to see whether the TPG Telecom Ltd (ASX: TPM) merger gets the go ahead with Vodafone over the next few weeks, which could shake things up too.
For reliable earnings and dividends I would much rather buy the shares of the quality businesses revealed for free in the report below.
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